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Jaitley jockeying for victory

Jaitley jockeying for victory
With the Modi Government’s anniversary bash well behind us, there is a pertinent criticism that the BJP government has miserably flunked the litmus test of shepherding through the Land Acquisition and the Goods and Services Tax (GST) bills and that too without doing the necessary spadework. Moreover, the BJP government has ended up unnecessarily resorting to an avoidable altercation with the rest of the political parties. As a result, both these bills which were crucial for enabling ease of doing business in India got stuck in a legislative bottleneck, dashing the collective entrepreneurial spirit of Indian industry. 

In commercial parlance, GST denotes a value added tax (VAT) which implies that each supplier in the supply chain of the product or service pays to the government the difference between the tax they charge their downstream customer and the tax they paid for the input. The only entity that does not receive this offset is the ultimate consumer of the product or service. In essence, the GST subsumes a host of indirect taxes in one umbrella, simplifies tax administration, improves compliance and removes embedded distortions in production, trade and consumption.

 GST in effect widens the tax base and renders it identical for both the Centre and States. Hence, as a tax on consumption, GST tightens the tax net which currently is riddled and replete with gaping loopholes by way of multiple rates and exemptions and classifications. No doubt, the GST confers benefits to the treasury of both the Centre and the States by making the tax process super efficient.
 Experts have pointed out that given the stark fact that the poor, working and lower middle-class sections expend a larger portion of their earnings on essential consumption compared to the middle-class or rich and super-rich classes, the consumption-centric GST is bound to hit the poor the hardest. With global  fiscal trends  shifting to indirect taxation that has a broader base than direct taxes, difficult to circumvent or evade and not income-dependent, India is also bending with the winds to cruise on a high growth path.  This is also precisely the reason why Opposition parties feign to frown upon the early launch of the GST lest they should pay a heavy political price if the consumption tax turns out to be the cruellest form of taxation on the weak and the vulnerable with no income or any dole indexed to inflation!    

In such a stone-walling exercise to embarrass the ruling party from scoring any tactical advantage in rolling out the GST on April 1, 2016, the Opposition has succeeded in getting the GST Bill, though passed in the Lok Sabha with the ruling party’s minatory majority, referred to a Select Committee of the Rajya Sabha to scrutinize the hurriedly-incorporated several amendments into the original Constitution (115th Amendment) Bill in 2011 of the UPA government. The UPA bill, duly and dilatorily deliberated by the Standing Committee of Parliament headed by the BJP leader and former Finance Minister Yashwant Sinha who took two and half years to submit its report, could not be passed into Act as it lapsed, following the dissolution of the 15th Lok Sabha. So when the BJP came to power in May 2014, it once again introduced the Constitution (122nd Amendment) Bill in December 2014 and got it passed in the Lok Sabha without subjecting the bill to any scrutiny by the House panel, a demand made by the scattered Opposition including the Congress. 

Naturally, the Opposition, desperately looking for thwarting the string of success the ruling dispensation, scored in pushing several bills into act within the first year of its governance stood on their  ground adamantly in refusing to let the GST bill be brought into the consideration and passing in the Upper House. The UPA government’s two senior ministers Messrs P. Chidambaram and Jairam Ramesh had gone on record, registering their stout opposition to the diluted GST Bill of the NDA, stating that the Select Committee headed by “knowledgeable BJP leader” Bhupender Yadav would leave no stone unturned to rectify structural defects the new GST bill lamentably suffers from.  Both the ex-Ministers question the Government’s proposal to keep taxes on alcohol, electricity and real estate outside the scope of GST.

 While taxes on petroleum products are out of the GST’s ambit to start with but with a proviso to include after the approval of the GST Council comprising of representatives of the Centre and all States, lack of such flexibility in the case of alcohol, electricity and real estate for inclusion later with GST Council approval is contested by well-meaning critics. Their point is that these goods constitute important avenues for revenue to the States which must perforce have to roll out a raft of welfare and pro-poor schemes to cushion them against the brute market forces that leave them with a sense of marginalization and alienation from the mainstream.

Both the Congress leaders also voiced concern over the aggregate rate of GST (Central GST plus State GST). As the rates doing the rounds hover anywhere between 25-27 percent  with most of the State Finance Ministers happily plumping for this bizarre band with an eye on yields, the affordable and ideal rate of GST as per the East Asian experience is anywhere  15 to 17 percent range. Way back in 2010, the 13th Finance Commission headed by fiscal expert Vijay Kelkar who first mooted the GST proposal in a report he submitted to the Vajpayee Government in March 2004, in a task force subcommittee note on GST recommended 12 percent (7 percent State GST and 5 percent Central GST as the country will have two GST rates combined). A panel of State government representatives floated a revenue-neutral rate (rate at which tax yields for States and Centre will remain the same as before GST) of 27 percent (12.77 percent CGST and 13.91 percent SGST). So, within the extreme bands of 27 percent—17 percent, the choice devolves on widening the base of a large number of goods and services so that a via media rate can be worked out that do not cause pain either to the treasury in terms of loss of revenue or to the consumers who should shell out higher consumption tax.    

Interestingly, the Chief Economic Advisor to the Ministry of Finance, Dr. Arvind Subramanian has voiced serious concern over the Government’s proposal to permit manufacturing States represented most vocally by Gujarat, Maharashtra and Tamil Nadu to levy a one percent additional tax on supply of goods that could attenuate the “Make in India” programme by encouraging imports rather than the seamless and smooth inter-state movement of goods that the GST has been credited with to usher in. Rightly did Dr. Subramanian argue that the irony of the additional one percent tax is not lost as this would “favor international trade over intra-national trade because every time a product crosses the border, it would have to pay extra non-vatable tax”. 

 Tax experts conversant with the issue contend that since States would be compensated for five years, there is no need for additional compensation through one percent tax, even if it is for a limited span of two years. They apprehend that after two years, states with a strong manufacturing base will likely arm-twist the Centre to further extend it. Ultimately, assuming the passage of the Bill in the Upper House of the Parliament in the monsoon session, the subsequent process entails many layers like framing rules and regulations and investing in information technology by trade and industry to comply with new rules to educating the stakeholders about the GST—too daunting a deadline to succeed!    IPA
G Srinivasan

G Srinivasan

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